Monday, November 19, 2012

In
its recent decision in H & M Petro
Mart v. Zurich Am. Ins. Co., 2012 U.S. Dist. LEXIS 163205 (E.D.Mich. Nov,
15, 2012), the United States District Court for the Eastern District of
Michigan had occasion to consider the scope of an insurer’s coverage
obligations under a storage tank liability policy.

Zurich
insured H&M Petro Mart under a Storage Tanks System Third Party Liability and Cleanup Policy, providing
environmental cleanup coverage for releases of product from four insured underground
storage tanks.The policy defined “tank”
to include “any connected piping, ancillary equipment and containment system
that is on, within, or under a 'scheduled location.'”Further, the policy defined “cleanup costs”
as necessary costs related to the “investigation, removal, remediation,
neutralization or immobilization of contaminated soil, surface water,
groundwater, or other contamination.”Notably, the policy contained an exclusion applicable to:

L.
any costs for the reconstruction,
repair, removal, maintenance, replacement, upgrading, or rebuilding of any
"scheduled storage tank system", personal
property, fixtures, buildings, or any other improvements and any site
enhancement or routine maintenance on, within, or under the "schedule
location(s).

H&M reported a release to
Zurich in 2009, and Zurich subsequently paid in excess of $190,000 in costs
identified as “cleanup costs.”Zurich,
however, disclaimed coverage for certain costs submitted by H&M that
related to reinstallation and/or reconstruction of gas pumps, such as
installation of new product lines, electrical wire and conduits, reconstruction
of a sewer system and canopy drain, installation of dispenser islands and
bumper guards, and re-installation and calibration of dispensers.H&M also sought coverage for costs
associated with pouring of 5,800 square feet of concrete on the ground above
where the new tanks had been installed.Zurich determined that such costs were for site enhancement and not
properly categorized as remediation costs.

H&M argued in a
subsequent declaratory judgment action that the denied costs were integral to
the remediation of its site and thus should qualify as “cleanup costs.”Specifically, H&M argued that in order to
effectuate the environmental cleanup required by the state, H&M was
required to rip up the concrete at its gas station and remove its tanks, in
order to gain access to the contaminated soils.As such, argued H&M, these items were damaged by the release, and
their replacement costs should come within the policy’s coverage.H&M also argued that it was required to
replace certain portions of its tanks and repour the concrete in order to
comply with applicable regulations.

The court agreed that while it
may have been necessary to remove portions of the tanks and concrete in order
to effectuate the remediation, this did not mean that the costs of replacing
such items came within the policy’s coverage.On the contrary, the policy specifically excluded coverage for such
items as indicated in exclusion L, which explicitly barred coverage for tank
repairs or reconstruction.The court
drew a distinction between costs necessary to effectuate the remediation and costs
covered under the policy:

Zurich assumed the costs for cleaning up the soil and
groundwater to bring its quality up to standards required by governmental
regulations. Zurich satisfied this obligation when MDEQ issued a "closed"
designationto the site. It appears as
if the services invoiced may be "necessary" in remediating the
contaminated area because excavation of the site was required to treat the
surrounding affected area. Inevitably, items on the surface of the location
required removal in order to remediate the contamination. Although they may be
necessary in order to effectuate remediation, these costs are explicitly
excluded in Section IV.L of the Policy.

The
court held similarly with respect to repouring concrete at H&M’s
station.The court agreed that while
such work was necessary to restore the site to its original condition, Zurich’s
policy did not afford coverage for such work.Rather, Zurich’s coverage obligations were limited to remediating any
environmental contamination.As the
court explained, the policy “unambiguously
excluded coverage for costs associated with restoring the entire premises back
to its original condition.”

Friday, November 16, 2012

In
its recent decision in Columbia Casualty
Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah
Nov. 14, 2012), the United States District Court for the District of Utah had
occasion to consider the concept of “related claims” in the context of claims
made products liability policies.

The
insurance dispute in SMI Liquidating
arose out of defective shoulder pain pumps manufactured by Sorenson
Development, which was insured by Columbia Casualty under successive
policies.The first such policy, issued
for the period July 1, 2007 through July 1, 2008, had limits of liability of
$10 million per claim and in the aggregate, subject to a $25,000 deductible per
claim and a $125,000 deductible aggregate.Notably, the 07-08 policy contained a “related claims” provision that
stated, in pertinent part:

If related claims are subsequently made against the Insured
and reported to the Company, all such related claims, whenever made, shall be
considered a single claim first made and reported to the Company within the
policy period in which the earliest of the related claims was first made and
reported to the Company.

The
policy defined “related claims” as all claims arising out of the same
occurrence or related occurrences.Further,
the policy defined related occurrences as those “that are logically or casually
connected by any common fact, circumstance, condition, situation, transaction,
event, advice or decision in the design, formulation, manufacturing,
distribution, sale, testing, use, operation, maintenance, repair or replacement
of your product or your work.”

While
the 07-08 policy was in effect, Sorenson was named as a defendant in four
lawsuits relating to its pain pumps.Columbia initially treated these suits as separate claims, each
triggering a separate deductible.Columbia did, however, have internal deliberations between its claim and
legal departments as to whether the four suits should be considered related
claims triggering only a single deductible.

Toward
the end of the 07-08 policy period, Columbia began the underwriting process for
a renewal.During this process, the
Columbia underwriter learned of the pending pain pump claims and became
concerned about future claims.She
determined that the renewal would have different deductible terms than the
07-08 policy.She offered a renewal on
the terms that all claims other than shoulder pump claims would be subject to the
original $25,000 deductible per claim, with a $125,000 deductible aggregate, but
that shoulder pump claims would be subject to a $250,000 deductible per claim,
unaggregated.Sorenson’s risk manager
understoodat the time why the renewal
would be on different terms and reluctantly agreed to it.The renewal became effective on July 1, 2008.

Claims
continued to be made against Sorenson during the end of the 07-08 policy period
and into the 08-09 policy period.In
August 2008, some seven weeks after the 08-09 policy became effective,
Columbia’s claim department decided to treat all pending claims as being
related and thus covered only under the 07-08 policy.Notwithstanding its decision, Columbia
continued charging Sorenson separate deductibles for each new claim made.Over the next year, as new claims were made
against Sorenson, Columbia issued supplemental correspondence amending the
grounds on which Columbia determined that the underlying claims were
related.Thus, whereas Columbia
initially took the position that various claims were related because they
involved the same pain pump model, this later evolved into the position that
any claims involving any pain pump model manufactured by Sorenson were
related.

During
a mediation in November 2009, the issue of related claims was brought to a
head. Columbia advised that it would be tendering the remaining limits of its
07-08 policy in connection with an upcoming mediation, and that at that point,
its coverage obligations would be terminated.Around the same time, Columbia learned of the fact that it had been
charging multiple deductibles instead of a single deductible as it should have
in light of its related claims position.Columbia tried to refund the “erroneously” paid amounts to Sorenson, but
Sorenson refused to accept the check.Columbia subsequently filed a coverage action against Sorenson seeking a
declaration that the pain pump claims were related claims covered only under
the 07-08 policy, and not covered under the 08-09 policy.

In
considering the issue, the court focused primarily on the deductible language
contained in the 08-09 policy that specifically distinguished pump claims from
non-pump claims.This deductible
scheme, concluded the court, indicated “a clear and unequivocal agreement that
shoulder pump claims would be covered, subject to specialized deductibles.”Columbia’s “related claims” position,
observed the court, would negate this express and specific language.The court further concluded the concept of
related claims in the 07-08 policy could be harmonized with coverage for pump
claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall
within the scope of the related claims’ clause, the parties specifically agreed
that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its
conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic
evidence would have compelled the same holding.Specifically, the fact that Sorenson and Columbia negotiated the
deductible scheme for the 08-09 policy indicated to the court that the parties
considered and agreed on the manner in which the 08-09 policy would provide
coverage for pain pump claims.Absent
from these negotiations was any discussion that the specialized deductible would
apply only if Columbia decided that pump claims made in 08-09 were not related
to those made in the 07-08 policy.In
this regard, the court found it “significant that Columbia’s decision to treat
all shoulder pump claims as ‘related claims’ under the Year One policy post-dates
the effective date of the Year Two policy by over a month.”Thus, the court concluded that the parties’
contemporaneous communications, at least at the time the 08-09 policy was
issued, reflected a mutual understanding that pump claims would be covered
under the 08-09 policy.Columbia’s
subsequent decision that the claims would only be covered under the 07-08
policy “fundamentally altered the allocation of risk bargained for by the
parties in the Year Two policy and was contrary to the parties’ express
intentions at the time of contracting.”

Tuesday, November 13, 2012

In
its recent decision in Nautilus Ins. Co.
v. Ricciardi Dev., LLC, 2012 U.S. Dist. LEXIS 161244 (N.D. Ill. Nov. 9,
2012), the United States District Court for the Northern District of Illinois
had occasion to consider when and under what circumstances an insurer can rely
on facts extrinsic to a complaint in evaluating whether it has a duty to
defend.

The
insured, Ricciardi Development was named as a defendant an underlying suit
alleging that it negligently owned and maintained an apartment building in
Chicago, Illinois, where a roof porch guard rail collapsed, causing plaintiffs
to fall to the ground.Among other
things, it was alleged that Ricciardi has work performed on the porch rails
that allowed for the accident.Notably,
the complaint alleged that the accident happened on May 24, 2009, and that
Ricciardi owned and renovated the building sometime prior to that date.The
complaint did not allege a specific date on which such work was performed.

At
the time of the accident, Ricciardi was insured under a general liability
policy issued by Nautilus Insurance Company.By endorsement, the Nautilus policy excluded coverage for bodily injury
resulting from Ricciardi’s work completed prior to September 11, 2008 and
specifically stated that Nautilus would have no duty to defend any claim
alleging bodily injury arising out of Ricciardi’s work, or work completed for
Ricciardi, prior to September 11, 2008.Having learned from its own investigation that Ricciardi only owned the
building only from 2000 through 2005, and thus could not have performed work
subsequent to 2008, Nautilus filed suit against Ricciardi, seeking a judicial
declaration that it had no duty to defend or indemnify on the basis of this
exclusion.

On
motion for summary judgment, the court agreed that the exclusion was clear and
unambiguous, and thus applied to claims against Ricciardi involving work
performed by or for it prior to September 11, 2008.The underlying suit, however, did not allege
the date on which various porch repairs were performed.The court reasoned, therefore, that if it
could only consider allegations contained in the underlying complaint, then
Nautilus would have a duty to defend, explaining “[b]ecause September 11, 2008,
the policy's cut-off date, is prior to May 24, 2009, the complaint alleges a
claim that potentially could fall within the policy's coverage.”The court further reasoned, however, that if
it could rely on facts extrinsic to the complaint, then there was no potential
for coverage since any work Ricciardi performed with respect to the porch necessarily
was completed prior to 2005 when Ricciardi sold the premises.

The
court observed the general rule of Illinois law, which is that an insurer may
consider only the facts alleged in the underlying complaint in determining a
duty to defend.It noted, however, an
exception to this rule applicable when an insurer elects to file a declaratory
judgment action regarding its duty to defend.Under such circumstances, explained the court, Illinois case law
generally supports the proposition that consideration of such extrinsic facts
is required except when these facts are central to the determination of an
issue in the underlying suit.Looking to
these cases, the court concluded that:

… this court can and must consider the undisputed extrinsic
evidence set forth by Nautilus—that Ricciardi sold the property on February 22,
2005, and completed the work on the porch and guardrail before then—in
determining whether Nautilus has a duty to defendRicciardi and Development. There is no basis
for concern that considering this evidence would "tend[] to determine an
issue crucial to the determination of the underlying [state court]
lawsuit." … Indeed, the opposing sides in the underlying suit unanimously
agree in this case that Ricciardi sold the property in February 2005 or, at a
minimum, that he did not own the property as of September 11, 2008. … If that
fact were contested in or significant to the underlying suit, the opposing
sides in that suit would not have agreed on that fact here.

Thus,
concluding that consideration of extrinsic facts was permissible and that these
facts were dispositive of the policy’s exclusion, the court agreed that
Nautilus had no duty to defend.

Friday, November 9, 2012

In
its recent decision in Sollek v. Westport
Ins. Corp., 2012 U.S. Dist. LEXIS 157649 (S.D. Miss. Nov. 2, 2012), the
United States District Court for the Southern District of Mississippi had
occasion to consider the conditions precedent to coverage under a claims made
and reported policy.

The
insured, Vann Leonard, was insured under a legal malpractice policy issued by
Westport Insurance Company for the period April 8, 2010 to April 8, 2011.In 2006, Leonard had been retained by Gilbert
Sollek to negotiate a home equity loan and to make the subsequent monthly
payments on the loan.In May 2011,
Leonard was arrested for embezzling client funds.While incarcerated, he failed to make
Sollek’s monthly payment.Sollek learned
of this on May 5, 2011 – nearly a month after the policy expired – and he later
filed suit against Leonard on May 31, 2011.Leonard was served with the complaint on June 2, 2011 while he was in
jail, and he later faxed a copy of the suit to Westport on June 15, 2011.At the time, Westport had been defending
Leonard in connection with other suits arising out of his alleged embezzlement
scheme.Westport, however, later disclaimed
coverage for all such suits, including Sollek’s, on the basis of a criminal
acts exclusion in the policy. Notably,
the disclaimer did not address the issue of when Sollek’s claim was first made
and reported.Solleck later brought a
declaratory judgment action against Westport challenging the validity of
Westport’s disclaimer to Leonard.

Westport
moved for summary judgment on the basis that Sollek’s claim was not first made
or reported during the policy period as required by the policy’s insuring
agreement.The court began its decision
by noting that Mississippi’s Supreme Court had not yet had occasion to
interpret a claims made and reported policy.It nevertheless observed that courts and commentators generally
acknowledge that “both
the making and reporting of the claim within the specified period” are
considered essential elements of coverage under such policies.The court agreed that Mississippi courts
would follow this majority rule.

After concluding that the
Westport policy was unambiguous and required the claim to be first made and
reported during the policy period, or that notice of potential claim be given during
the policy period, the court considered whether these conditions precedent to
coverage were satisfied.Sollek
conceded that he had failed to assert a claim against Leonard prior to the
expiration of the Westport policy, and as such the date on which the claim was
reported to Westport was irrelevant.He
nevertheless argued that Westport received notice of a potential claim during
the policy period such that it had a coverage obligation to Leonard for the
subsequently made claim.The
Westport policy indeed contained a notice of potential claim provision stating:

[i]f, during the current POLICY PERIOD, any INSURED first
becomes aware of a POTENTIAL CLAIM and gives written notice of such POTENTIAL
CLAIM to the Company during the current POLICY PERIOD, any CLAIMS subsequently
made against any INSURED arising from the POTENTIAL CLAIM shall be considered
to have been first made during the POLICY PERIOD the INSURED first became aware
of a POTENTIAL CLAIM.

The
court found this provision to unambiguously require that the notice of
potential claim be given to Westport prior to the policy’s expiration, and that
this notice be given to Westport in writing.The court also observed that the policy’s notice provision, applicable
to claims or potential claims, required the insured to report specific
information, including a description of the claim and alleged wrongful act, a
summary of the relevant facts, potential damages, etc.The court concluded that because Westport did
not receive written notice of a potential claim during the policy period, or
the specific information required by the notice provision, the policy was not
triggered.

In
so concluding, the court rejected Sollek’s argument that there was “substantial
compliance” with the policy’s reporting requirement concerning potential claims
since Leonard’s defense counsel, appointed by Westport to defend different
lawsuits, had become aware of Sollek’s potential claim during the policy period.The court did not agree that defense counsel
could be considered Westport’s agent for the purpose of giving notice under the
policy, and it also observed that there was no evidence that defense counsel had,
in fact, learned of Sollek’s potential claim prior to the policy’s
expiration.More significantly, the
court rejected the insured’s entire theory of “substantial compliance,” noting
that there was no authority to support the “finding that substantial compliance
applies with a claims-made and reported policy when the insurer learns of a
potential claim but receives no report from the insured” and that any such rule
would be contrary to the contractual requirements set forth in the policy.

Sollek
argued in the alternative that the doctrines of waiver or estoppel precluded
Westport from denying coverage on the basis of when the claim or potential
claim was first made and reported, since Westport had failed to identify this
coverage defense in its initial disclaimer letter to Leonard.Citing to various case law from the federal
and state level, the court observed that waiver and estoppel cannot be used to
expand a policy’s coverage, although an insurer can waive compliance with
policy conditions.While noting it to be
a matter of first impression under Mississippi law, the court agreed that the
reporting requirements in a claims made and reported policy are inherent to the
policy’s scope of coverage and thus cannot be subject to waiver or estoppel, explaining
that:

… allowing waiver or estoppel to nullify these requirements
would fundamentally change the nature of the insurer's risk. It would likewise
expand coverage beyond the scope of the bargain. Neither waiver nor estoppel
create coverage in this context.

Tuesday, November 6, 2012

In
its recent decision in The Saint
Consulting Group, Inc. v. Endurance Am. Specialty Ins. Co., 2012 U.S. App.
LEXIS 22631 (1st Cir. Nov. 2, 2012), the United States Court of
Appeals for the First Circuit, applying Massachusetts law, had occasion to
consider the application of a restraint of trade exclusion in a professional
liability policy.

The
insured, The Saint Consulting Group (“Saint”), was a real estate consulting
firm specializing in land use disputes.In particular, Saint had developed a specialty in representing grocery
stores in their attempts to prohibit or delay Wal-Mart from opening stores in
their client’s territories by spurring litigation and regulatory proceedings.At issue in the insurance coverage dispute
were Saint’s efforts to block two Wal-Mart stores from being developed in
Illinois.Underlying plaintiff, Rubloff
Development, had purchased two parcels of land it intended sell to Wal-Mart to
be used for construction of Wal-Mart and other retail stores.Saint, acting on behalf of a competing
grocery store, undertook efforts to rally local businesses against the Wal-Mart
stores.Saint’s efforts in these regards
were led by a single employee, Leigh
Mayo, who used a pseudonym while pursuing these efforts, allegedly
concocted false stories about the negative the effects of Wal-Mart stores, and
concealed the fact that he was a Saint employee working on behalf of a Wal-Mart
competitor.

While
these anti-Wal-Mart efforts were still proceeding, Leigh Mayo left Saint’s
employ, and shortly thereafter sold to Rubloff thousands of internal documents concerning
Saint’s efforts to block the Wal-Mart stores.Upon learning of this, Saint demanded the documents back.Rubloff shortly thereafter filed suit action
against Saint seeking only a judicial declaration that the documents were not
privileged and that Rubloff could keep them for future use in a lawsuit.Rubloff shortly thereafter amended its
complaint to seek various forms of injunctive relief concerning other documents
in Saint’s possession.While the court dismissed Rubloff’s claim for
injunctive relief, it ultimately declared that Rubloff was entitled to keep the
documents.Just prior to ruling on
Rubloff’s claim for declaratory relief, Rubloff filed a second amended
complaint that included substantive causes of actions relating to Saint’s
efforts to block or delay the Wal-Mart stores.Specifically, the second amended complaint included causes action of for
RICO violations based Saint’s efforts to conceal Mayo’s true identity and
employer, conspiracy to restrain trade under the Sherman Act and Illinois
Antitrust Act, tortious interference with prospective economic advantage,
common law fraud, and conspiracy.

Saint
ultimately was successful in having each of these causes of action
dismissed.It did so, however, without
the assistance of its professional liability insurer, Endurance, which had denied
coverage to Saint for the original and amended complaints on the basis of a
restraint of trade exclusion stating that coverage did not apply:

… to any Claim based upon or arising out of any actual or
alleged price fixing, restraint of trade, monopolization or unfair trade
practices including actual or alleged violations of the Sherman Anti-Trust Act,
the Clayton Act, or any similar provision [of] any state, federal or local
statutory law or common law anywhere in the world.

In
the subsequent insurance coverage action, the United States District Court for
the District of Massachusetts granted Endurance’s motion to dismiss, concluding
that the exclusion barred coverage for the causes of action specifically
brought under the Sherman Act and the Illinois Antitrust Act, and that it also
applied to the other causes of action since each such cause of action arose out
of the same alleged restraint of trade.

In
considering the matter on appeal, the First Circuit noted that under
Massachusetts law, if even one cause of action escaped the restraint of trade
exclusion, then Endurance would have an obligation to defend the suit in its
entirety.Beginning first with the
amended complaint filed in the underlying action, the court agreed that the
causes of action for antitrust violation under federal and state statute were
excluded.“Far more interesting” to the
court was whether the RICO causes of action and common law causes of action
were excluded, notwithstanding the fact that they were not titled as “restraint
of trade” counts.In considering this
issue, the court observed that the exclusion applied to causes of action “based upon or arising out of
any actual or alleged . . . restraint of trade.”The phrase “arising out of,” it noted, is
typically afforded a broad construction under Massachusetts law.With this in mind, the court observed that:

It can hardly be disputed that the factual allegations of the
Second Amended Complaint allege a conspiracy to forestall competition through
misuse of legal proceedings and through deception. And every count in the
Rubloff Action that is not itself described as an antitrust claim depends
centrally on the alleged existence of such a scheme.

The
court therefore concluded that because the statutory and common law causes of
action in the second amended complaint were premised on Saint’s efforts to
restrain trade, the exclusion applied to each such cause of action.In so holding, the court rejected Saint’s
argument that its success in the underlying action evidenced the fact that
Saint had not engaged in the prohibited conduct.The court found this argument to be a
“non-sequitur,” explaining:

Exclusion N depends not on whether conduct occurred or, if so,
whether it was unlawful, but on what the complaint alleged. What was factually
alleged in the Second Amended Complaint in no uncertain terms was an
anti-competitive scheme and, where the pertinent counts arise out of that
alleged scheme, Exclusion N negates coverage. The exclusion does not depend on whether a
successful defense can be advanced: it excludes meritless claims quite as much
as ones that may prove successful.

After
concluding that Saint was not entitled to coverage for the second amended
complaint, the court then sought coverage for the initial complaint concerning
only Rubloff’s declaratory judgment action to keep the internal documents sold
by Mayo as well as certain injunctive relief.The court concluded that coverage was unavailable for that complaint, since
the dispute over possession of documents did not involve a wrongful act arising
out of Saint’s professional services, and thus did not fall within the policy’s
insuring agreement.